The dull, autumnal weather might have arrived this week, but there were brighter spells in the floundering bond markets with a flurry of new bond issuances. With September underway borrowers are keen to tap markets before the Federal Reserve begins tapering and rates slowly begin to return to more normal levels.
This comes after a year which has seen chatter of a Great Rotation, a bond bubble and the end of the 30-year bull market in bonds, not to mention the Fed’s tapering announcement in June, which led to more than $23bn being pulled from bond funds in the ensuing week.
But all is not lost. The market was rejuvenated this week when Verizon, the US broadband and telecoms giant, sought to raise the funds for its purchase of Vodafone’s 45% stake in Verizon Wireless with the issuance of just under $50bn of bonds – an auction which saw $100bn of demand.
This was the largest corporate bond deal in history, more than double the previous record of $17bn from Apple in April.
Elsewhere, last week saw Sprint Corporation, another US telecoms company, launch the largest ever deal from a high yield borrower when it sold $6.5bn of a double-tranche issue made up of $2.25bn of eight-year bonds and $4.25bn of 10-year bonds, priced with a 7.25% and 7.875% yield respectively.
These deals show not only that investors still have an appetite for yield, but the credit markets are actually in good health and talk of a bond bubble, the end of the bond bull market and a Great Rotation might have been just that – all mouth and no trousers. Some asset managers are optimistic bonds are still attractive with yields of 4.5-6.5% and this has been buoyed by the threat of tapering leading to a selloff in Treasuries, making overall bond yields more attractive.
Indeed, bonds such as high yield or lower rated investment grade could benefit from strengthening economies like the US.
But while this is positive, investors should also learn the lessons from similar high-profile deals, namely Liberty Global’s acquisition of Virgin Media in June. After years of trading as a high yield credit, it was pushed into investment grade, but the acquisition shunted it back to high yield, resulting in sharp losses.
And as TwentyFour Asset Management’s Mark Holman commented this week, it will also be interesting to see how large investors will cope when the inevitable flurry of secondary activity arrives. Once these deals settle down and investors are happy with their holdings, market makers switch their attention and deploy their capital elsewhere.
“By the year-end we could well be seeing Verizon sold in maybe clips of $10m despite the enormous deal sizes,” said Holman.
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